Friday, March 26, 2010

Are only fools continuing to pay their mortgage, if it's underwater, when the government is rewarding those who don't?

Zero Hedge:A New Wave of Defaults? -- I have been working with a young couple for a year now. They have been up against it. They look pretty typical. They bought an apartment with a first mortgage and low down payment. Then they made improvements with a HELOC. He lost his good job and now works for less. She works long hours and they have a kid.

They are underwater on the 1st mortgage so the HELOC is worthless...

I sent them a link to last week’s Barney Frank letter to the big banks telling them to write down non performing second mortgages. I sent them the link for the BoA story and their program to write down principal for delinquent mortgage debt.

They called just now. They made up their minds. They will not pay either the 1st or the 2nd this month. The “entrance fee” to getting the debt relief they need is to not pay any longer. The cost will be a tarnished credit. They no longer care.

Does this story mean anything in the Macro Big Picture of defaults? I am certain that it does. A rising trend is about to become a rogue wave.

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Realty Check / CNBC:Principal Forgiveness: And Now We All Pay -- The government is officially giving borrowers back home equity. Yep, somewhere between $35 and $50 billion worth. Of course we've all lost over $5 trillion, but who's counting? Lenders still aren't required to do it, but they're going to get an awful lot of taxpayer-funded incentives to do it...

Let's face it, the underwater issue (that is borrowers owing more on their loans than their homes are worth) is now far bigger than the subprime issue and the unemployment issue. Yes, it's concentrated heavily in five states, but it still manages to plague home prices nationwide. People are walking away in greater numbers than ever before, and people who want to stay are unable to get into modification programs because of their overwhelming negative equity...

The key changes are principal reductions and larger payments to 2nd liens (including for HAFA short sales). For short sales, the 2nd lien payment has been doubled from 3% of the outstanding balance to 6% - although this is probably still below the typical recovery rate for 2nd liens...

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Megan McArdle / The Atlantic Online:More Mortgage Meddling: Will it Work This Time? -- The easier you make this, the more moral hazard there will be. You may not care, thinking that this is just about transferring money from banks to needy people--but with the aggressive deployment of FHA loans, that ultimately means the taxpayers are going to be on the hook for a lot of marginal mortgages. Given how badly the FHA has already been overstretched by the collapse of the private market, this is worrisome...

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The Corner / The National Review:Herb Allison's Lapidary Words -- Indeed, the administration is clearly having night terrors about a second financial crisis being spurred by a deepening wave of mortgage defaults, so the program is full of Rube Goldberg stuff to bribe and cajole bankers and keep them from foreclosing on defaulting borrowers. The Post reports that the "new effort also increases the incentives paid to those lenders who find a way to avoid foreclosing on delinquent borrowers even if they can't qualify for mortgage relief."

Let's repeat that. These borrowers: A., are delinquent; B., don't qualify for any existing mortgage-restructuring programs; so, C., Uncle Sam is just going to keep throwing money at the bankers, basically shelling out whatever it takes to keep these delinquent borrowers in their houses, these delinquent loans on the books, and housing prices leaning on yet another political manipulation of the real-estate marketplace. And the theory is: this will stabilize the market. Real-estate investors may seem kind of stupid sometimes, but they are not that stupid...

Before first mortgages can be dramatically modified in such a way, any home-equity loans that stand behind those assets have to undergo painful changes too. In theory, these second liens may have to be wiped out before principal on first mortgages is cut.

U.S. banks have roughly $1.5 trillion of residential mortgages on their balance sheets, but they also hold another $600 billion or so of home-equity loans, according to Barclays Capital data.

The prospect of having to write off a chunk of that $600 billion may be making some banks reluctant to cut principal on first mortgages...

The Obama Administration announced the allocation of $14bn in Troubled Asset Relief Program (TARP) funds to incentivize lenders to provide principal reductions and refinance underwater borrowers into FHA-backed mortgages.

Under the terms of the voluntary program, lenders will be required to write down at least 10% of the mortgage principal for borrowers who are current on their payments. The program is open to borrowers whose mortgage isn’t currently insured by the FHA. The principal reduction must bring the new FHA loan to value (LTV) to 97.75% and make the new payments account for 31% of the borrower’s monthly income...

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The Big Picture:Delinquencies Continue Rising -- Serious delinquencies continue to rise – in the 64% of the market covered by Mortgage Metrics, there are now about 3.4 million loans either seriously delinquent or in the process of foreclosures. Completed modifications actually declined in each of Q2-Q4 of 2009. (Foreclosures have been flat).

Thus, as this chart suggests, the various programs amount to little more than window dressing hiding the underlying weakness of the Real Estate market...